Envveno Medical Corp annual report, FY2018

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Hancock Jaffe Laboratories, Inc. — FY 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. The supplied filing is for Hancock Jaffe Laboratories, Inc.; it does not identify “Envveno Medical Corp” as the registrant. This is an annual report, not a standalone fourth-quarter report.

Business context

Hancock Jaffe was a development-stage medical-device company developing biologic cardiovascular and vascular products. Its lead candidates were VenoValve, a porcine valve intended to treat deep-vein chronic venous insufficiency, and CoreoGraft, a bovine conduit for coronary bypass surgery. A pediatric Bioprosthetic Heart Valve was also under evaluation. The company planned to license, sell, or partner its products with larger medical-device companies; none of these candidates had FDA approval.

Financial performance and liquidity

  • Revenue: $186,552, down 55.8% from $422,111 in 2017. 2018 revenue comprised $116,152 in LeMaitre royalties and $70,400 in related-party contract research; there were no product sales. The 2017 comparison included $184,800 in product sales.
  • Gross profit: $186,552 versus $2,452 in 2017. Cost of revenue was zero in 2018 versus $419,659 in 2017; the filing attributes the prior-year gross loss on ProCol sales to low sales and high fixed supplier costs.
  • Operating expenses and loss: SG&A was $6.48 million, up 19%; R&D was $1.24 million, up 91%. Operating loss widened to $7.85 million from $6.10 million.
  • Net loss: $13.04 million, up 67% from $7.79 million. Loss attributable to common stockholders, including preferred-stock deemed dividends, was $16.35 million; basic and diluted loss per share was $1.75 versus $1.35.
  • Unusual non-cash and financing items: Debt-discount amortization rose to $6.56 million from $1.71 million. The company recorded a $1.48 million gain on extinguishment of convertible notes, a $191,656 gain from derivative fair-value changes, and a $319,635 impairment charge on derma-filler development rights. The 2018 loss also included a $3.31 million deemed dividend to preferred stockholders.
  • Cash flow: Operating activities used $6.36 million, compared with $4.20 million in 2017. Investing activities used $12,422. Financing activities provided $9.03 million, including $7.66 million in net IPO proceeds and $2.60 million in convertible-note proceeds, partly offset by debt repayments and IPO costs.
  • Cash and working capital: At year-end, cash was $2.74 million and working capital was $1.31 million, compared with $77,688 and a $8.00 million working-capital deficit, respectively, in 2017. At March 12, 2019, cash was reported as $4.09 million, including $810,055 of restricted cash.
  • Debt and capitalization: Convertible notes were converted into common stock at the June 2018 IPO; related-party notes were also converted, and other notes were repaid. No notes payable or derivative liabilities remained on the December 31, 2018 balance sheet. The company reported 11.72 million shares outstanding at year-end and 14.17 million as of March 13, 2019; outstanding warrants and options represented additional potential dilution.
  • Margins: The filing reports gross profit but does not provide a stated gross-margin percentage; 2018 gross profit equaled total revenue because cost of revenue was zero.

Material changes and outlook

  • The June 2018 IPO raised $8.63 million gross, including the underwriters’ over-allotment, and converted preferred stock and convertible notes into common equity. Despite the improved year-end working capital, the company said it needed additional capital to meet obligations and fund operations.
  • LeMaitre royalty income was 62% of 2018 revenue. The three-year royalty term ended March 18, 2019; management warned that the company would no longer receive these royalties afterward unless it secured other product-related revenue.
  • In December 2018, Colombia’s INVIMA approved a 5-to-10-patient first-in-human VenoValve study. The first implant was reported successful on February 19, 2019, with no early adverse events reported at that time. Preliminary results were expected in June 2019 and further results in the fourth quarter of 2019. The company planned to seek an IDE for a U.S. pivotal trial after sufficient positive data.
  • CoreoGraft preclinical work with the Texas Heart Institute began in late 2018. Results from an animal study were expected in the second quarter of 2019; further testing and human studies remained contingent on successful results and regulatory discussions.
  • The company was auditing prior BHV preclinical studies; its board would decide whether development should continue. It recorded an impairment of its separate derma-filler development rights and expected to stop related R&D after remaining contracted work.
  • After year-end, on March 12, 2019, the company announced a private placement of 2,360,051 shares at $1.15 per share for $2.714 million gross and approximately $2.326 million net. This provided additional capital but diluted existing shareholders.
  • Management and the auditor cited substantial doubt about the company’s ability to continue as a going concern over the next twelve months. The company expected continued losses and said further financing, collaborations, or other capital resources were necessary; financing might not be available on acceptable terms.

Risks, contingencies, and other notable items

  • Litigation and restricted cash: ATSCO sought $809,520 plus costs over disputed tissue-supply invoices. The company had fully accrued the claim; a January 2019 attachment order was for $810,055, which the company planned to appeal. The filing reports $810,055 of restricted cash. A settlement conference and jury trial were scheduled for July and September 2019, respectively. The company also fully accrued a disputed $178,926 claim by its former law firm, plus interest and costs.
  • The company depended on external tissue and component suppliers, had limited manufacturing resources, and faced clinical, FDA approval, reimbursement, commercialization, and product-liability risks. It also lacked its own sales and marketing infrastructure.
  • Revenue was highly concentrated: 100% of 2018 revenue from continuing operations came from LeMaitre royalties and related-party research services, according to the filing’s disclosures. The royalty arrangement expired in March 2019.
  • Operating lease payments totaled $1.30 million through 2022. The company expected adoption of the new lease standard to add approximately $1.1 million in right-of-use assets and lease liabilities.
  • Management stated disclosure controls and internal control over financial reporting were effective at December 31, 2018; the auditor did not provide an attestation on internal controls.

Key facts for investors to verify

  • Cash available for operations after separating restricted cash, and the timing and terms of any additional financing.
  • Whether the March 2019 private placement proceeds were sufficient to fund operations and clinical development, and the resulting fully diluted share count.
  • VenoValve trial enrollment, safety, efficacy endpoints, reported results, and progress toward a U.S. IDE and pivotal trial.
  • Whether CoreoGraft preclinical results supported further development and what additional regulatory studies were required.
  • The outcome and cash impact of the ATSCO and former-law-firm disputes, including the attachment and restricted-cash status.
  • Revenue replacement after the LeMaitre royalty term ended, including any licensing, strategic partnership, or product-sale agreements.